Taxation 101 for Freelancers in India

6 mins read
by Angel One

In recent years, the number of professional freelancers has risen significantly as labour laws evolve around the world in line with more people opting for unconventional work hours and routines. Freelancers are professionals skilled at a particular task who take up assignments from different persons or companies. There are usually negotiations, post which an agreement is undertaken between the freelancer and the company regarding the terms and conditions of the assignment, including the pay, deadline, etc.

A freelancer is not engaged by the company in a full-time role and does not make an appearance in the company’s payroll. While the freelancer enjoys several advantages, including the flexibility of work hours and even the amount of work, they are not privy to benefits from the company in the form of Provident Fund or related benefits.

However, tax considerations do still apply to freelancers.

GST for Freelancers in India

Previously, service tax for freelancers in India was applicable under the old taxation regime. However, since the introduction of the Goods and Services Tax, the service tax and even other taxes such as the Value Added Tax (VAT) have been replaced by the GST.

A GST rate of 18% is applicable on most services, and similarly, the GST for freelancers in India is 18%.

TDS for Freelancers in India

In most cases, the payment received by the freelancer is after tax has been deducted at source. Tax deducted at source (TDS) provision comes into play when the client pays the freelancer more than INR 30,000 for a single assignment or as an aggregate amount over the period of the financial year, and this deducted amount needs to be submitted to the government. The TDS applicable on such a transaction is 10% .

Presumptive Taxation for Freelancers:

As a freelancer, while it is imperative for you to remain tax compliant, the government also does offer several benefits which can help make the process significantly easier and much more convenient for you.

One such way is through the mechanism for presumptive taxation for freelancers in India. Section 44ADA under the Income Tax Act, 1961, pertains to the Presumptive Taxation Scheme. This scheme essentially allows freelancers to pay taxes on only half of the income they have earned through the year. However, this is only applicable if the total annual income is less than INR 50 lakh.

To fully understand the presumptive taxation scheme, it is also important to know the different deductions that freelancers can claim on taxes in terms of their expenses. The law empowers freelancers to deduct the expenses they have incurred in completing a job, as long as they are directly related to the specific job mentioned. There are several conditions imposed on the expenses that can be claimed by freelancers for deductions, and these include:

  • Expense directly incurred for the assignment at hand
  • The entire amount mentioned was spent exclusively and fully for the purpose of the assignment
  • The expense was incurred during the taxation year being mentioned
  • The freelancer did not make the expenditure for a personal purpose or as a capital expenditure
  • The expenditure was not incurred for any offense or act prohibited by the law

Some of these expenses, which can be claimed as deductions for taxation reasons, could include:

  1. Paying rent on property
  2. Repairs undertaken on rented property
  3. Depreciation on capital assets
  4. Expenses incurred for an office, including on stationery, bills on utilities such as electricity, internet, etc.
  5. Travel expenses directly pertaining to the assignment
  6. Expenses incurred for meals, entertainment or hospitality. This can include expenses incurred during meetings with clients
  7. Taxes paid to local authorities
  8. Insurance on the property or place of business
  9. Expenses upon which deductions can be claimed can also include registration of a domain name and apps purchased to help test the product.

Now considering these deductions, it is important to assess how the presumptive taxation scheme applies. As an example, Rahul has earned INR 40 lakh over the course of a financial year through various projects and assignments. However, if INR 10 lakh of this income is spent on expenses on which he can claim tax deductions, his total taxable income becomes INR 30 lakh, if he has not availed benefits under the presumptive taxation scheme.

By availing the presumptive taxation scheme, Rahul is able to show his taxable income as half of his gross income, i.e., INR 20 lakh. Thus, the preventive taxation scheme goes a long way in helping freelancers save their hard earned money.

How to Calculate Income Tax for Freelancers

If you have been wondering how to calculate income tax for freelancers, there’s no cause for worry anymore. Income tax for freelancers is computed in much the same way as income for regular and full-time employees of a company. Several of the same deductions will apply which are in place for regular employees, and freelancers can also avail benefits under pertinent sections such as Section 80C or Section 80D of the Income Tax Act, which pertain to exemptions and deductions for expenses such as on premiums for life insurance policies.

An income tax calculator is available online, which allows freelancers to input details regarding their income as well as the expenses on which they can claim deductions and exemptions. Once they have entered all these details on the online income tax calculator, they will be in a position to assess the amount they are required to pay as taxes.

Tax Benefits for Freelancers

There are several taxation benefits available to freelancers under the Income Tax Act, 1961, many of which are also available to full-time employees of a company. Many of these benefits are available under different subsections of Section 80 of the Act.

Read on to learn more about these tax benefits for freelancers.

  1. 80C offers deduction of up to INR 1.5 lakh for different kinds of payments made towards insurance policies or even a provident fund.
  2. 80CCC offers exemption up to INR 1.5 lakh on investments made towards pension plans.
  3. 80CCD offers exemption on investments made towards the central government’s pension schemes.

As a freelancer, it can often prove exhilarating to have the freedom to work whenever you want and from wherever you want. However, it is important to remember the taxation laws that apply to you and ensure that you remain tax compliant at all times.